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(Wealth) 9 Rules of Wealth for building investment portfolio

To become wealthy, says investment adviser Andrew Hallam, heed nine rules about managing your money. He offers sound, basic, practicable advice.

And here are a quick summary of his 9 rules of wealth when building your investment portfolio.

1. “Spend Like You Want to Grow Rich”

If you want to become wealthy, promise yourself to “do no harm.” Create “assets, not debts.”

You should spend wisely, but you don’t have to scrimp.

“We should all make a pledge to ourselves much like a doctor’s Hippocratic oath: above all, do no harm.”

Growing wealthy requires a strategy. You must carefully watch how you use your money so you will have some left over to invest. If you consume less than you earn, you will dramatically increase your odds of becoming financially secure.

Change the way you look at your life, so you can be happy with what you have and less inclined to spend recklessly. As you build your savings, you’ll be able to make long-term investments in the stock market. With the right returns, you could create a healthy portfolio.

“The surest way to grow rich over time is to start by spending a lot less than you make.”

Even the Holy Qur’an remind us not to spend wastefully (217:26-27)

2. “Use the Greatest Investment Ally You Have”

You might have discovered something valuable hidden in the boring pages of your school textbooks: the incredible benefits of compound interest. Warren Buffett bought his first stock at age 11 and jests that given the benefits of compound interest he should have begun investing much earlier.

As Buffett says, planning can make all the difference.

If you invest $100 and it grows at 10% compounded annually, your investment becomes $161.05 in five years and $78,974.69 after 70 years. Stock markets can move dramatically up or down, but since the 1930s, the US stock market has provided investors a return of more than 9% annually.

To start, make a note of all your expenses for three months. At the end of that period, calculate how much it costs you to live every month. Make that the basis of your fiscal plan. Pay off any high-cost loans. The sooner you begin, the better off you will be.

“Before we learn to invest to build wealth, we have to learn how to save.”

And one of the best financial advise anyone could give is

“Do not save what is left after spending, but spend what isleft after saving.”

3. “Small Fees Pack Big Punches”

You probably wouldn’t be able to compete with an expert in his or her field. But you might find one exception: the area of money management. Some financial advisers won’t guide you to the right investments. Many just want to sell you products that make the most money for them.

For example, instead of suggesting that you buy an index fund – “a single product that has thousands of stocks within it” and typically charges low fees. An adviser might recommend that you buy an actively managed mutual fund with multiple transactions and fees.

To earn better returns than most experts can provide, invest in three index funds: one from your country, a global stock market index fund and a government bond fund.

Paul Samuelson, the first American to win the Nobel Prize in economics, says that purchasing an index fund provides you with the most effective way to diversify your investments.

If you could ask Warren Buffett where you should invest, he’d suggest that you buy index funds. He has instructed his estate’s executors that he wants his heirs to invest in index funds.

“If we want to grow rich on a middle-class salary, we can’t be average. We have to sidestep the consumption habits to which so many others have fallen victim.”

Studies show that you can’t pick the best-performing mutual funds based on how they did in the past. Mutual funds that achieve outstanding results in one period can perform dismally in the next. However, you can boost your chances of success by investing in indexed mutual funds. You won’t be able to opt for an actively managed mutual fund that outperformed stock market indexes, and you could make a serious mistake if you choose a mutual fund based on its past performance. Always remember that advisers make money when they sell you actively managed funds. That’s why they counsel you to buy them.

“If we want to grow rich, we need a purposeful plan. Watching what we spend so we can invest our money is an important first step.”

4. “Conquer the Enemy in the Mirror”

If you understand how your feelings can torpedo your strategy, you’ll be able to invest more sensibly. Consider a mutual fund with average returns of about 10% over the last two decades. It might have underperformed in certain years and done well in others. That’s why it’s called “average returns”.

If the fund had 1,000 investors, you might think they’d all get about the same return. But, in fact, they don’t, because most investors pull their money out of poorly performing investments to chase better returns elsewhere.

If you don’t want to live with the stock market’s gyrations, invest in an index fund over the course of 25 years, and add the same amount to it every month.

“Sticking with index funds might be boring. But it beats winding up as shark bait, and it gives you the best odds of eventually growing rich through the stock and bond markets.”

Many people invest under the delusion that they can get into the stock market and cash out of it at just the right time to earn a big profit. Professionals call this “market timing,” and it’s difficult.

Most financial advisers stand a better chance of beating someone on the level of Roger Federer at tennis than they have of growing their portfolio by timing the market. The Vanguard Funds’ John Bogle – Fortune magazine’s choice as one of the four “investment giants” of the 20th century said that in his 50 years of investing, he didn’t know of anyone who systematically made money using market timing.

“Gold has jumped up and down like an excited kid on a pogo stick for more than 200 years. But after inflation, it hasn’t gained any long-term elevation.”

When you buy a stock market index fund, you come to own, in effect, a part of several businesses. Through them, you may own real estate, manufacturing facilities and consumer products. Understanding this gives you an edge as an investor.

A company’s earnings and the growth of its stock price may diverge at times, but they are inextricably linked. The share price of a company typically reflects the growth in its profitability.

Over the short term, stock markets can act in a variety of wild ways. If they seduce you while they’re surging upward in price, you could become much poorer when they drop.

“As far back as we have records, at least once every generation, the stock market goes bonkers.”

5. “Build Mountains of Money with a Responsible Portfolio”

You can benefit from owning an index fund, but you must balance your portfolio so you can absorb market fluctuations. If the market falls, the value of your investments will drop by an equivalent amount. That’s hard to take, especially as you near retirement.

“Every generation, it happens again. Stock prices go haywire…many people abandon responsible investment strategies. The more rapidly the markets rise, the more reckless most investors become.”

With bonds, over time, you may make less money than with stocks. However, their value fluctuates less, and that could protect you if the stock market tumbles sharply.

When you buy a bond, you’re lending money to the government or to a company. As long as that organization can pay your interest and return your money, your investment remains secure.

You can have confidence about purchasing bonds from governments in developed countries. You take on more risk when you buy corporate bonds from leading companies and even more when you buy bonds from smaller companies. They usually pay higher interest rates, but you may face a greater chance that they could default.

“A Chinese proverb [suggests] that wealth doesn’t last more than three generations.

There’s a generation that builds wealth, a generation that maintains it and a generation that squanders it.”

6. “Sample a ‘Round-the-World’ Ticket to Indexing”

“Warren Buffett famously quips: ‘Preparation is everything. Noah did not start building the Ark when it was raining’.”

Index funds relate closely to exchange-traded funds (ETFs). Both are made up of a certain amount of stocks representing a particular market, but ETFs trade, just as equities do, on the stock market. The fees for ETFs are higher than those for index funds.

Countries all over the world have index funds, but the United States offers the most. Citizens of most countries can buy index funds or ETFs listed overseas. If you live in Canada, you can evaluate the Canadian bank TD’s actively managed funds alongside its e-Series index funds; over a decade, you will find that the index funds provide a higher return. In the United Kingdom, financial institutions offer index funds with fewer benefits and they charge greater fees.

To take just one example, investor Paul Howarth didn’t want to entrust his money to an index fund, so he opened a brokerage account. He put about 30% of his funds into an iShares global bond ETF and the remainder in Vanguard’s global stock ETF. Once a year, Howarth evaluates his portfolio. If global markets rise, he cashes in his global ETF and adds the money to his bond ETF, so he can retain a balanced allocation.

“You’ve inherited a windfall. Should you invest it all at once? Or should you add the money to the markets, month by month…Nobody knows for sure. But earlier lump sum investments usually win.”

7. “You Don’t Have to Invest on Your Own”

Often, investors don’t want to expend energy in investing or they aren’t sure about their choices. They would rather someone else did it for them. Americans have to spend far less money than anyone else in the world for financial advice. As a result of Internet access, many people now understand that Wall Street professionals make money by selling actively managed mutual funds.

Consider Vanguard funds. John Bogle set up Vanguard as a nonprofit enterprise to help ordinary investors. Those who buy its funds become its owners. When you buy, you must sort through Vanguard’s list of index funds or ETFs. This makes some investors nervous and leaves them seeking guidance.

Today, “intelligent investment firms” can help you manage your finances for a low fee. Or you can build a portfolio of index funds.

8. “Peek Inside a Pilferer’s Playbook”

Even if you decide to buy an index fund, your financial advisers may produce a range of reasons for advocating against it. For instance, they could say you take on greater risk when you buy an index fund. They would note that an index fund commits all its money to the market, so if stock prices plummet, you could face greater losses. To prevent such losses, active fund managers do not invest fully in the stock market.

Your advisers could suggest that active managers can liquidate their holdings before stock market crashes and buy shares back once markets become less volatile. Such ideas theoretically denote good opportunities, but they assume that managers can successfully time the market. Consider any manager’s fees before you make a decision.

Your adviser may offer to show you mutual funds that outperformed stock market indexes.

However, research shows that mutual funds that did well in the past may or may not do well in the future. They rarely match their previous performance. Be wary of advisers who suggest that, because they understand the economy so well, they can help you outperform a collection of indexes.

The financial industry grants brokers and financial advisers a relatively low status. Some financial advisers train for only two weeks in financial planning, so be sure the advisers you select are well educated and well trained, with sound reputations.

9. “Avoid Seduction”

Keep your eye out for scams.

You can outperform most investors by participating in index funds. You open yourself up to making mistakes when you seek unconventional investments. Some people look for index funds that suggest they can outdo the market. Never succumb to sucker claims that you’ll make “easy money.”

For instance, emerging markets often offer sensational returns, but they can turn down sharply and quickly. If you don’t like this kind of volatility, choose a “total stock market index” rather than investing excessively in emerging markets. And gold can turn out to be a poor investment. If you invested $1 in gold in 1801, by 2016 your investment would have been worth only $54. 


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